Monday, November 28, 2011

The New Inefficiencies: Scouting and Development

As many avid baseball fans are already aware, MLB has announced the signing of a new labor agreement that will govern baseball for the next five years. This new CBA extends baseball’s labor peace that reaches back to the 1994 strike, the longest such streak of the four major leagues after the NBA and NFL’s lockouts this year. The new CBA takes many significant steps forward. Players will be now be tested for Human Growth Hormone under the league’s PED policy, the ridiculous Elias rankings have been eliminated in favor of a system based on the salary teams are willing to offer arbitration candidates, and earlier deadlines will speed the offseason up and allow more time for free agency to play out as teams can more quickly evaluate their needs and potential solutions.

However, many analysts see the CBA as a step backwards for competitive balance, allowing large-market teams that can afford a large Major League payroll to prosper while teams with smaller payrolls now have less chances to make up the difference through intelligent resource allocation. By imposing a hard cap on international spending and creating a system that effectively amounts to a hard cap on the Amateur Draft, the new CBA means that small-market teams will find it much harder to make up their Major League payroll gap by signing and developing young talent.

Over the past couple years, several small-market teams have isolated draft and international spending as a market inefficiency that could allow them to compete with teams that can afford a larger major league payroll. Top draft spenders include the Pirates, Blue Jays, Nationals, and Royals, while the international market has been dominated by the larger-budget Mariners and Yankees with the Astros, Pirates, A’s, and Blue Jays just behind. These teams will no longer have the ability to outspend their competitors in these markets, so they’ll need to find new ways to stretch their dollars in order to compete with richer teams.

For these teams, the key to competing on a small payroll will always be an abundance of young, controllable talent. The Rays’ success, for example, relies on the production they get from players during their pre-arbitration and their arbitration-eligible seasons, as they are priced out of the market for elite free agent talent. Without an ability to spend big on amateurs to acquire that young, controllable talent, these teams will need to stretch the little money they are allowed in order to build their farm systems and produce cheap Major League talent.

If teams are no longer able to spend big in order to take advantage of the inefficiencies of the draft and international markets, they will need to find new ways to maximize the amateur talent they do acquire. For now, the focus of small-market teams will shift to their amateur scouting and player development.

With draft bonuses capped by the new system, teams are no longer charged with deciding whether a certain player is worth going “over slot” for, as the slot penalties go from a harsh tax on dollars spent over slot to the possibility of losing future draft picks. Now, teams will simply be looking to draft the best player available that they believe is ready to sign with a Major League organization. Since teams won’t be spending as much money on draft and international bonuses, they have the opportunity to reallocate some of this money toward their scouting department. With these additional resources, teams will give their scouts a better chance to properly evaluate amateur players, and the small-market teams hope that this will result in a continuous flow of talent to the big leagues.

Teams will also look to their player development staffs to get the most out of every draft pick. When a player is drafted, his team sets goals for his development and attempts to guide that player towards achieving those goals and becoming a big-league talent. In order to cull as many useful players from the draft and international market as possible, I believe teams will allocate more resources in researching player development and trying to optimize their system to get the most out of their amateur talent.

I believe this will also shift teams’ focus more towards younger players. For years, many have suggested that selecting high school players in the draft or signing younger international players may be an unnecessary risk, as due to their age and relative inexperience these players are unknown quantities. However, I’m currently researching data for another project that suggests that these players may not be exceptionally risky after all, and drafting them gives teams the ability to mold the player much more than they could an older prospect. By selecting young players with their limited amateur spending budgets and developing those players with the teams’ strategy in mind, small-market GMs will be continue to maximize the output of their spending on amateur talent even if that spending is now capped.

While MLB owners simply saw a place in the CBA where they could save some money, the draft and international spending caps actually act as a huge barrier to competitive balance. The new CBA removes a market inefficiency many teams saw as their avenue to compete with a smaller budget. Now that this inefficiency is no longer an option, small-market teams will look to improve their amateur scouting and player development systems. If they are unable to continue to produce a strong pipeline of MLB talent under the new spending constraints, this CBA will simply widen the gap between the rich and poor teams.

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